There's a lot of name calling in China's telecommunications industry. And it's hard to blame mobile operators when they label messaging apps or social media services freeloaders.
Over-the-top (OTT) applications such as Tencent Holdings' messenger WeChat and Sina Corp's micro-blogger Sina Weibo are largely dependent on mobile data networks to reach customers. China Mobile, and the country's two other operators have spent the better part of a decade and tens of billions of dollars putting those networks in place, only see the internet giants scrape off the top of their profits. When users use apps such as WeChat they don’t send texts or make calls that they have to pay for.
China Mobile, the world's largest mobile operator with more than 760 million users, still generates nearly 70% of its revenue from traditional voice and texting services, the exact segment of the market that's being hit as more smartphone users type and whisper messages into apps like WeChat.
The telecoms giant is lumbering on this issue. If it considers Tencent and Sina to be taking a free ride, the internet firms likely think of China Mobile as rigid, uncreative and slow to respond to demand.
Up and over the top
Operators in China have been slow to catch on to the OTT trend. Where once users made calls and sent text messages, earning fees for telecoms firms, they are increasingly communicating over the internet thanks to smartphones. That is biting hard into the telcos’ earnings.
China Mobile is the poster child for rigidity in the industry. Analysts note the behemoth’s inability to adapt to a changing technology environment or cash in on data services.
Mobile operators worldwide have experienced billions in losses to OTT services, yet many have made that money back with slick 3G and 4G networks, as they are able to charge users for data packages. China Mobile is widely scorned by Chinese users for its poor 3G network, which by most accounts has failed to bring the company adequate returns. Its 4G network, while expected to drive the company forward, was only licensed in December and can’t be measured for success just yet.
The country’s OTT industry is one of the world's most innovative and fastest growing, and as the industry leader in the country, China Mobile has lost the most to such services. It's not surprisingly that the company has also led the way in competing directly with companies such as Tencent.
In March 2013 China Mobile said it would revamp its Fetion platform, an instant messaging service that launched in 2007. The service was originally intended to compete with internet-based messaging applications such as Tencent's QQ and MSN Instant Messenger, long before China's smartphone era. The push to expand Fetion was an attempt to pull users off of WeChat and onto its homegrown service.
That effort hasn't gained traction but China Mobile hasn't given up. In November, the company launched a voice-to-internet-protocol service called Jego, which functions similar to Skype.
Such a model is flawed, however. Despite herding users away from independent messaging apps, the services will not retrieve the voice and text messaging revenues that China Mobile has lost to internet firms. At best, it will “keep some users in its own garden,” Neha Dharia, a Bangalore-based telecoms analyst at research firm Ovum, said in an interview.
“It's going to be hard to get mobile operators to compete with OTT giants because the nature of their business is so different,” Dharia said. “Mobile operators get money from voice, from text and from data. So for them to come up with an OTT service, it's detrimental to their own business.”
Internationally, other major mobile operators have tried to corral their users into using services that they co-developed – many to little avail. Telephonica, a Spain-based global telecoms firm, launched a free messaging app in May 2012 only to ditch the product little more than a year later.
Ganging up on the big guy
If building its own messaging services doesn't work, China Mobile may have a few other tricks up its sleeve. Given that the company answers directly to the Ministry of Industry and Information Technology (MIIT), it may be able to convince the agency to tighten up regulation of the industry and even collect new fees from unfriendly business.
In March last year, it looked like that could happen. MIIT head Miao Wei said that OTT players, while accruing hundreds of millions of users on their services, made no contribution to the mobile networks on which they proliferated. He said that mobile operators might be allowed to collect fees from internet companies in the future.
Global companies have tried similar strategies to weed out pesky messaging apps. The Dutch telecoms firm KNP sought to add charges to the bills of users of WhatsApp, a global chat service similar to WeChat, after the company started losing revenues from text messaging. The Dutch parliament blocked the extra fee in 2012, leaving KNP at the mercy of innovative, disruptive technologies.
Fears that MIIT will levy heavy fees on players like Tencent have subsided for now. That's because China Unicom, the country's No. 2 mobile operator, quietly announced a partnership with WeChat in August. The tie-up, a co-branded sim card that gives Unicom users exclusive emoticons, the smiley faces and animations that increasingly appear in messages, and a little free mobile data, demonstrated a tolerance among some mobile operators for OTT products and services developed by internet companies. But more importantly, it's a strategy to strike at the biggest player in the market.
“China Unicom and [China] Telecom are more open to the internet players. They want to cooperate with the players to compete with China Mobile,” said Vincent Fu, a principal analyst for technology and service providers at research firm Gartner. “China Mobile is more concerned about them because they're the market leader.”
China Telecom, the smallest of the three operators, has followed suit. In August, the firm formed a joint venture with Chinese internet firm Netease to launch a messaging service called Yixin. The more China Mobile pushes against new OTT services, the more China Unicom and China Telecom will seek out tie-ups. By partnering directly with Tencent, China Unicom may succeed in pulling some customers away from China Mobile. “One reason that they were cooperating was that China Mobile was so against WeChat. So it was their way of gaining market share,” Dharia said.
China's two smaller mobile operators are less sensitive to low text and voice revenues because they make more money from individual data users than China Mobile does. For them, more messaging and social media apps on their networks mean more revenue from data services.
Tough virtual reality
If that wasn't enough, a new competitor to mobile operators reared its head in December: Mobile virtual network operators, or MVNOs. Late last year, MIIT issued 10 licenses to companies to operate networks that can sidestep the major mobile players. A virtual network license will allow companies to rent network space from mobile operators in order to conduct their own mobile and data services.
This should be a wakeup call to China Mobile. Before long, OTT services will no longer need to use its mobile data to reach customers. If Tencent became a mobile virtual operator, “it wouldn't need to deal with China Mobile anymore,” Dharia said.
Only domestic private companies can apply for the licenses now, but Fu said there is word that the central government could open the industry to partnerships with foreign companies in the not-so-distant future, another potential shakeup to the market.
China Mobile should stop with the name calling and figure how to get in good with some of China's most innovative companies before it's too late. By partnering with companies that make popular apps, the operator can attract new customers to its network. But first it will need to generate better revenues with its 4G network than it did with its 3G blunder, which would make it less sensitive to decreasing text message income.
In the future, the operator and the internet firms should also be able to forge revenue-sharing deals that will help China Mobile get a little bit more of what it feels it deserves. “They both need each other and a lot of operators are realizing that,” Dharia said. “[Tie-ups] will happen more and more in a couple of years.”